Welcome to another typical Dubai property gain and pain story. A working couple in the pink cold of December 2007 – resembling hordes of others sucked into real estate buying frenzy – pool in their hard-earned savings, all $55,000 of it. The sum constitutes 10 percent of a villa in the upscale Springs Community. A leading Islamic financial institution, neck deep into the local property market, happily fills in the rest.

It was dream come true for a happening 30-something couple. An Equated Monthly Installment (EMI) of around $3,500 (their combined monthly income at this stage being just over $7,500) looked manageable. They saw the property as a five-year investment window that would guarantee a rental saving of at least $150,000 over these years. When they moved into their own space with lush green lawns, lakes with jogging tracks, barbecuing with friends and family, their quality of life went up a few notches, as well.

A year into this idyllic setting, the wife lost her job in the meltdown and things started to change. With just one salary to survive on, and the monthly installment not going anywhere, uncertainty loomed. Luckily for them, the husband found a better paying job, with free accommodation, in neighboring Abu Dhabi. They moved on, thinking the villa’s rent would offset its monthly installment. Ironically, it was at this point that the rent market crashed to half forcing the couple to foot the remaining half of the EMI every month.

When even this became untenable, the couple requested their mortgage provider to revisit loan terms. Shari’a experts told them that any Islamic financial institution should offer three options – increase loan duration, reduce profit rate, or offer at least a year-long moratorium. The plea, however, has so far fallen on deaf years. On the contrary, they were warned that such options would eventually lead to bigger EMIs in the years to follow.

UNANSWERED QUESTIONS
Here are the questions that have been asked: Isn’t this a fit enough case for an Islamic finance institution to prove that it is really ‘ethics-based’? Also, since “verily, [Islamic finance] contract is by mutual consent”, shouldn’t Shari’a-compliant financial institutions be lending a more sympathetic ear and restructuring or rescheduling loan agreements wherever deemed necessary considering the ground reality?

The response, so far, has been a cacophony of yes, no and may be, with varying reasons assigned to each. Rushdi Siddiqui, the global head of Islamic Finance at Thomson Reuters, says there is a need to first define ethical, as it is a moving target. According to him, it has always been the case that Islamic financial institutions (IFIs) should prove they are ethical, but not necessarily different. However, it is not always so easy to bridge the gap between the theory and practice of Islamic finance.

“Ethics is embedded in the contracts that IFIs utilize on a daily basis, and these are not necessarily apparent to the public eye, due to the conditions in which they are activated. We have to remind ourselves that Islam does not discourage profit motives, it only forbids the unethical forms of profit taking or profiteering,” says Siddiqui. He also maintains that there is no general rule of thumb that can be extended across all Islamic financial institutions.

“It really is a matter of their local economic environments which dictate their need to restructure/reschedule,” he says. As per his analysis, banks exposed to Dubai credit may need to restructure and many already have, but in contrast, banks financing to Abu Dhabi, Qatar or Saudi Arabian markets are still doing well as most indicators suggest strong fundamentals.

PROFIT/LOSS ASSUMPTIONS
Experts also dismiss the assumption that profit as well as loss should be shared between parties in an Islamic finance contract. “This is a very idealistic statement circulated by those unfamiliar with Islamic Finance. It is a common misconception that Islamic finance is all about profit and loss sharing. It isn’t. It’s about risk sharing and not risk shifting,” says Siddiqui. According to him, Islam has allowed all types of contracts other than a loan with interest. Hence, a particular contract isn’t necessarily the most optimal. “What Islam does support is protection of the weak in contracts, as information is asymmetric at times, and a reorientation of priorities beyond profit making.”

Humayun Kabir, general manager of wholesale banking at the National Bank of Oman, says alongside ethics it is also a question of propriety. “Banks carry a heavy responsibility of safe keeping of depositors’ money. It is not just ethical to show flexibility to the borrowers in distress because it may result in an ‘unethical’ treatment of depositors. Mark-to-market ensures that the correct and most current picture is presented and consequences are dealt with
rather than burying our heads in the sand,” says Kabir.

For him, there is a difference between being ethical and charitable. “Islamic financial institutions like any other responsible bank should try their best to help the client in difficulties, but not at the cost of depositors and, to a lesser extent, of shareholders who may have invested their life savings in the bank,” he adds. Besides these
arguments, there is little evidence to suggest that conventional banks have been more considerate in this regard, especially during the downturn. M. Aslam, top executive at a leading automotive firm, has had a similar yet more painful tryst with a conventional bank.